Sebi may tighten IDR disclosure norms

Global movements seen impacting securities issued in India

Securities and Exchange Board of India (Sebi) is expected to come out with the details and operating guidelines for the issue of Indian depository receipts (IDRs) soon.

The Department of Company Affairs (DCA) had released the broad guidelines for IDRs on Wednesday.

The Sebi guidelines would be more or less in consonance with the existing guidelines for initial public offerings, but the disclosure requirements may be more stringent "since we have to be sure that only the best companies come in", officials said.

Disclosure norms are expected to be strict as the securities issued here will be impacted by the global movements in the underlying shares.

IDRs are securities issued in India by companies incorporated abroad, to Indian investors, based on the underlying shares, issued abroad and traded at any of the global exchanges.

There are mixed reactions to the idea of IDRs. Many merchant bankers feel that there may not be much interest among global corporations to raise money from India.

And, Indians may be interested only in putting their money in global corporations such as Microsoft, IBM, Coca Cola among others.

"Investors will only subscribe to those companies which have an immediate brand recall," said a merchant banking source.

Global corporations could come into India to raise money only if the costs associated with it are much lesser than in their home countries.

According to industry circles, the move could actually benefit non-resident Indians (NRIs) or those NRIs who have set up businesses abroad.

"These companies can raise capital in India and use it for their own purposes," market watchers said. For such promoters of business - especially those who are starting on new businesses - raising capital of small amounts up to $10 million sometimes becomes a problem as the cost of finance is too high and they have to approach venture capitalists there.

The proceeds from the IDRs will be used by the companies in their home country just as American depositary receipts are used by Indian companies to raise money from abroad and use it here for their own purposes.

According to the IDR guidelines issued by the DCA, companies raising capital in India need not necessarily have their operations in the country.

Under the DCA guidelines, companies wishing to issue IDRs should have a paid-up capital and free reserves of $100 million (around Rs 450 crore), average turnover of $500 million in the three preceding financial years and should have made profits in at least five years preceding the issue. The IDRs issued cannot be converted or redeemed into the underlying equity shares up to one year.

Merchant bankers said that this move will make shares of global corporations, which they have only heard about, accessible to the ordinary investor.

At present Indian investors can invest in shares listed overseas and the recent relaxation in the overseas spending limit up to $25,000, without any questions asked, has placed owning shares in such companies easier for Indian investors.

"However, it makes a difference being allowed to invest in these shares in the home country," sources said.

DCA has also put a cap on the issue fee at 0.5 per cent of the issue size for issues of up to Rs 100 crore and 0.25 per cent for issues exceeding that amount.